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Monthly Archives: August 2015

PM Lee’s devotes a considerable, probably, the most defining concerns of Singaporeans, in his NDR to the issue of ‘Foreigners & Immigration’. In this regard, Profs Pang Eng Fong’s & Linda Lim’s ‘LABOUR, PRODUCTIVITY AND SINGAPORE’S DEVELOPMENT MODEL’ (The Singapore Economic Review, Vol 60, No 3, Aug 2015) is most prescient and pertinent as a mirror with which to examine the successes and failures of the government’s FT policy.

All the more so, since PM Lee frames the issue as one where ‘there are no easy choices…every option has a cost…a downside’, where even a certain choice can ‘tank’ our economy. Very unappetizing Hobson’s choices indeed – brought about by multi-mil$-paid ministers who claim they are ‘servants of Singaporeans’.

Note that PM Lee has not committed himself to any particular course of action. He merely reiterates that he believes that he is “doing what Singapore needs and what best safeguards your interests,” and expects voters to just plain trust him with 5 more years to do as he pleases, preferably without 1/3 parliamentary opposition.

An Objective Assessment of Labour & Productivity PoliciesProfs Pang/Lim puts the government’s policies over the years in its original historical context. That of a young nation jettisoned from her umbilical hinterland unexpectedly with a mishmash of multi ethnical peoples facing some truly existential threats.

Hence, the route to development was quite unlike the other 3 more culturally homogeneous Tiger economies of HK, S Korea and Taiwan where they also already had a thriving private sector. “Singapore evolved a distinctive development model based on a large role for multinationals and an extensive involvement of the state in reshaping the economy and society“ but not quite the local private sector.

The government also intervened in the social system to promote values and attitudes favorable to nation-building, self-reliance and hard work, over the years imposing a multiplicity of controls and regulations which profoundly shaped Singapore society. Those controls include domestic capital (CPF, budget surpluses, reserves), land & property and the labour market.

By and by, citizens became highly dependent on the government for basic needs while looking to both government and MNCs (supported by tax incentives, infrastructure subsidies & labour policies) as ‘generator of wealth and opportunities – to the neglect of the local private sector.

A key in the government development roadmap was the ‘depoliticizing of the labour movement’, giving the government de facto control and employers greater bargaining power. Perhaps, Profs Pang/Lim are too polite to say that the movement was, in fact, ‘PAPliticizied’, just like the PA. However noble the original intentions of serving the People were, they all suffered ‘mission creep’ (à la strategic creep) to serve the Party instead.

The worst impact is the vice-grip control over workers wage levels under the fear-mongering rationale of losing out to other countries. Meantime, employers as good as completely disregarded the complementary need to invest in higher productivity through training or capital. Trumpeting glowing upshots, PM Lee and many Singaporeans do not see the irony of citizens with “S$1000/-“ household salary needing ever more grants from PAP government just to own a basic 3-room flat… Is this a desirable downshot when PAP had been in near absolute control of everything?

Labour Market Outcomes & Reconsideration
From 1970, foreign non-resident workers comprise 3.2% of our total workforce. This then sextupled to 28.1% in 2000 (Yeoh and Lin, 2012). Then, under Lee Hsien Loong’s leadership from 2004 and 2014, as if to outshine his predecessors, his team surreptitiously executed, non-transparent, non-accountable-to-parliament policy moves, further doubling foreigners from 603,000 to 1.3 mil. So, it’s already 38.1%, exceeding the 1/3 of our 3.5mil workforce. How does his current Manpower teammate cap it at 1/3 while still allowing in foreigners albeit at a slower pace? Minister, Math Magician or none other than the 1973 Senior Wrangler Cambridge Alumnus hoping to square the numbers – if we give them another 5 years to play around with?

Here’s the real deal. What Chris Kuan has also been writing about ad nausuem: Hui and Toh (2014) found that “employment as the driver of growth has increased its share from 31% in the 1970s to 75% in 2000s”.

Staying with Profs Pang/Lim’s objective study, we give credit where due. On the surface, the obvious gleaming, LED-lit, mechanical city and impressive skyline rightly testify to the success of PAP’s growth at all costs policies. Yes, progress made, lives improved vastly. But below that surface? The price paid is the 75% share of labour and employment as driver of growth while consumption as % of GDP is a miserable 40%.

In effect then, city & skylines we have to show for from those employment policies. But money in the pocket to actually expense to live Swiss-style? Little wonder most of us, while appearing to live rather comfortably, are stuck with the nagging, silent reminder that ‘money no enough’ even as train/bus fares and petrol pump prices increase in the face of oil price halving. The seriously out-of-touch PM Lee and his teammates, including Mr Tharman who upped the pump prices, ride no train/bus to work while taxpayers pay For the petrol in their Mercs. Only their math adds up…along with our cost of living. Not theirs.

But is PAP’s labour-as-3/4-of-growth gameplan in decay and nearing its inevitable end?

Profs Pang/Lim observe that if “big-ticket foreign investments” have been falling “since Singapore tightened its manpower policies and lost its attraction for companies that depend on cheap foreign labor” (Chia, 2015) it only “confirms that many foreign investments were attracted to Singapore because of the ease of employing foreign labor, rather than any intrinsic locational advantages.” Even EDB expects “a sharp reduction in the number of skilled jobs created, lower fixed asset investment, and a decline in business expenditure… in line with the Government’s restructuring exercise to raise productivity and reduce reliance on foreign workers” (Teng, 2015).

That just about puts paid to the claim that ‘foreigners create good jobs for Singaporeans’ sans serious downsides. Should the PAP Team be called to account, or given another 5 years?

Who Should Next Set – or Reset – Policies, Singaporeans?With the intellectual, evidence-based, objective clarity of neutral academicians’ analyses of PM Lee’s vaunted PAP economic and labour policies now better understood, what next, Singapore?

PM Lee would have us believe – perhaps, covertly sharing Senior Lee’s characterization that voters are daft – that the PAP is the only proven team in town. Team PAP can do no wrong. When evidence points to the contrary, their Manpower Minister “reiterated that the tightening of the Republic’s foreign manpower regime was not a reaction to past mistakes”. No admission of blindsides. Nice $mil, just-trust-us job to hold on to with guaranteed “no sacking” policy.

Without batting an eyelid, using a National Day Rally (for a GE rally…AG, sir, isn’t it illegal?), Singapore’s PM pleads to Singaporeans, ‘Please support me. Please support my team.” Not unlike a second-hand car salesman, he pumps up all the good stuff but conveniently hedges his policy blindsides. We just need to take his word for it that whatever the horrible consequences of the ride he commandeers, hey, he’s doing what Singapore needs and best safeguards our interests.

Voters must be aware that each vote is also for those below 21 years, our children and theirs. The choice is clear, for all the good achieved, is the current Team PAP – lacking in accountability, transparency, caring more for theirs’ and their own interests via a parliament that they completely dominated for 50 continuous years – the one to trust another 5 years to do what they think is right, never mind what the People think?

Or do our children and we deserve that overdue change to reset our lives?

Addiction to labour that is, which is why Prime Minister Lee Hsien Loong has this to say at the NDR.

“If we close our doors to foreign workers, our economy will tank.”

In this article, the writer critique the PM from a conversation with Professor Pang Eng Fong who briefly introduced himself to the writer at the Singfirst forum on national reserves. He is the former Dean of the Lee Kong Chian School of Business at the SMU, High Commissioner to the UK and Ambassador to the EU.

The writer and blogger Law Kim Hwee had coffee with the professor to discuss socio-economic issues and a recently published paper “Labour, Productivity and Singapore’s Development Model” written by Linda Lim, University of Michigan, and himself.

Growth driven by Labour

Singapore’s impressive economic record is characterized by “extensive growth” which is driven by factor accumulation (adding capital, labor, land to create “extensive growth” or more output from more inputs) rather than increases in total factor productivity (the more efficient use of existing resources, enhanced by technological progress, to create “intensive growth” producing more output per unit of input). This is evidenced by the lack of Total Factor Productivity (TFP).

On the labour, the proportion of foreign non-resident workers rose from just 3.2% in 1970 to 38.1% in 2014, more than a third of the labour force of 3.5m. Very few countries have GDP growth that is driven largely by an influx of foreign labor. Professor Hui Weng Tat and Associate Ruby Toh of the Lee Kuan Yew School of Public Policy found that “employment as the driver of growth has increased its share from 31% in the 1970s to 75% in 2000s”.

Growth with perspiration, not inspiration

The Singapore government did recognize criticism that the impressive growth is achieved with perspiration, not inspiration; euphemism for the lack of productivity. Hence the restructuring efforts to attract knowledge-intensive and high value added industries such as clean technology and precision engineering, and high value services such as medical services and wealth management.

Although these efforts have transformed Singapore’s industrial landscape, it makes little difference to TFP growth, with productivity actually falling 0.8% in 2014.

Why the failure?

Despite a recognition that a switch toward intensive growth — or increasing productivity — was necessary, the basic model of state-driven multinational-led export manufacturing did not change, but rather was extended through ever more factor accumulation.

Industrial upgrading, for example, required more and more capital investment per unit of output, and of labor, with its attendant need for ever-more-generous tax incentives and other subsidies.

When rapid growth at full employment caused the prices of land and labor to rise, the policy response was to prevent market adjustments from taking place, by continuing to subsidize scarce land (e.g., in state-provided industrial estates) and allowing greater access to foreign labor which depressed the price of competing local labor

Without the obsessive government intervention, market forces would have forced out businesses that are overly reliant on cheap foreign labour, subsidized land, low taxes and rebates. This would have reduce the need for cheap labour and generated higher productivity.

Carrots for Business, Stick for Workers

The above simply provide academic confirmation to the writer’s assertion that the PAP government avoided its own Hard Truths. For the government has consistently back-tracked from its own policy intentions to reduce dependence on foreign labor, increase productivity and encourage high wages. This has been so consistent that businesses simply had to wait for those obscenely remunerated knees to buckle. Look no further than the recent relaxation of the foreign workers curbs.

The reason given was the repeated short-run need of foreign investors (and local SMEs which were part of their Singapore supply-chain) for “cost competitiveness” in the face of external demand shocks, and increasing international supply-side competition to which the traded goods sector (export-oriented manufacturing) is highly vulnerable.

When economic adjustments have to be made, the vast majority of adjustments fell on workers through reductions in CPF contribution rates and by the suppression of real wages through ready access to cheap foreign labour. This has the awful effect of structurally weak personal consumption which would have lessen those external shocks on the export sector.

Conclusion

Academia or at least the independent thinking part of it is not enthralled by the PAP’s economic record. It is just that the 156th ranked Pravda-in-the Red-Dot did not publish such thinking. If Singapore stayed within its long run growth potential of 2-4% instead of running at 6-7% during PM Lee’s tenure, as the writer repeated ad nauseam, then all these socio-economic problems would not exist today or are much smaller.

Similarly, some economic growth are not worth having if these means more subsidies, tax breaks and foreign labour. Singapore should concentrate on commercial and industrial services in which her advantages are much harder to be competed away by neighbouring countries. More on this in another article.

Nevertheless, the writer is left with a depressing thought. Each successive policy back-tracking to the extensive growth model, diminishing returns worsened and opportunity costs rose as pointed out by Pang and Lim. The data conform to research by Paul Romer and others suggesting that

“the availability of abundant cheap labor not only discourages investment in productivity but also reduces innovation and increases income inequality.” (Economist, 2013).

However the Prime Minister seems bent on reinforcing policy failures with his party’s addiction to the easy option of cheap foreign labour evidenced in his NDR speech. More of the same with 6.9m population or even 10m? We have already seen what 5.5m population has caused today. This addiction may well spell the end of Singapore’s existential meaning of citizenship and nationhood.

The man can appear and disappear in a puff of smoke like a genie. Especially to those who are lapping up his words as the fount of all economic and financial wisdom. The key points of his speech at the SG50
Lecture Series at the Economic Society was that Singapore’s inequality is not specially high and that the low income inequality achieved by the likes of Denmark and Finland was due to tax and social transfer
and hence imposed a “very heavy burden of taxation on their populations”.

Essentially, Mr. Tharman is saying that the large reduction in income inequality in Denmark and Finland, i.e. the difference between the Gini coefficients before and after Tax and Social Transfer (i.e. benefits and
entitlements) was the result of a heavy tax burden. He said that the PAP government’s approach is to keep the overall tax burden low but ensure that tax revenue is used “in a fair and progressive way by targeting support for the low- and middle-income groups where it helps them most”.

Gini drop, why did the dog not bark?
As far as the writer knows, the latest Gini after tax and social transfer for Singapore was 0.416 in 2014, much higher than the 0.37.

If the latest household survey has been released to show a drop to 0.37, why did the Straits Times not blare this across its headlines or as Sherlock Holmes famously asked “why did the dog not bark?” It is
inconceivable that the marginal increase in social transfers, in particular the $8b Pioneer Generation Package which actually amounts to just $500m disbursement a year could have cause such a large drop
in the Gini coefficient after tax and social transfer. Nevertheless 0.37 is still a much higher number.

But, Channel News Asia reported Singapore Gini at 0.43. comparing it favourably to the developed countries average at 0.47 completely failing to mention that this is before tax and social transfer and
conveniently omitting Singapore’s 0.37 Gini after tax and social transfer, the more important Gini, compares poorly to the developed countries average of 0.29.

Low Tax Mirage
In the comparison of Singapore’s low tax burden to Denmark and Finland high tax burdens, this is what Mr. Tharman did not say
●Danish and Finnish high tax burdens were mostly the result of taxes going into social security systems.
●Singaporean’s low tax burden in comparison is due to cashflows going into social security (CPF) taken place outside of tax.
●Danish and Finnish high taxes went on to provide a comprehensive set of social entitlements such as state pension, free or nearly free healthcare, old age subsidies for utilities, childcare subsidies, survivor benefit, disability benefit, free schooling, out of work benefits.
●Singapore CPF contributions provided only a basic retirement allowance and medical coverage which still require large out of pocket expenses.
Therefore to compare the cost and benefit of Denmark and Finland to Singapore, the flow of monies out of households to the government must take into account not only taxes but non-tax payments. That is to
say total financial transfer must be the basis for comparison, not just taxes. In Singapore’s case, this must include CPF contributions and out of pocket medical expenses. This is the cost side.

On the benefit side, the ability to bequeath upon death can be seen as an “advantage” to Singapore. However this “advantage” has to take two things into considerations. One is the large out of pocket medical expenses which reduces the “advantage” of the bequests. Next is the narrow range of benefit extraction from CPF compared to the comprehensive range of social entitlements given to Danish and Finns. It is then a matter of comparing bequests to comprehensive entitlements but do remember bequests have no value to Singaporeans during their lifetimes.

Taking all of the above into consideration, Singapore’s tax burdens may be a lot lower than Denmark and Finland but in terms of total transfers from household to government, Singapore pays as much or even more than Danish and Finns once CPF contributions and out of pocket medical expenses are factored.

Yet each Singaporean in his/her own lifetime receives far less benefit extraction than the Danes and the Finns.

Conclusion
Denmark and Finland achieved low income inequality with heavy tax burdens. But Mr Tharman’s smoke and mirror is that while Singapore’s tax burdens may be much lower, total financial transfers to the government is equal and higher than Denmark and Finland and yet income inequality remained much higher. That is to say despite high financial transfers to government, Singaporeans received very little in return. Do not get fooled by Mr. Tharman’s low tax fairy tale.

Malcolm Gladwell’s bestseller, “The Tipping Point”, discusses ‘how little things can make a big difference’. He postulates that ‘the best way to understand the emergence of fashion trends, the ebb and flow of crime waves…the transformation of unknown books into bestsellers…the rise of teenage smoking…the phenomena of word of mouth, or any number of the other mysterious changes that mark everyday life is to think of them as epidemics. Ideas and products and messages and behaviours spread just like viruses do.’

Gladwell’s ‘in-depth research spanning a number of different fields, industries, and scholarly disciplines…identifies three key factors that each play in role in determining whether a particular trend will tip into wide-scale popularity.’ The ‘tipping point’ then refers to ‘the point at which a series of small changes or incidents becomes significant enough to cause a larger, more important change.’
Whence the Tipping Point of GE 2015?
Is Singapore on the verge of THE Tipping Point that will spur the needed change in the way she has to be governed going forward, ditching ‘growth at all costs’ via cheap labour and additional dubious foreign talents and rent-seeking, extractive fiscal and monetary means masquerading as free market forces in play?

Could the show of Opposition solidarity in avoiding multi-corner fights in the next GE be the harbinger of that Tipping Point? Let’s take a look.

To reach a tipping point, a potential trend needs 3 factors in play; the Law of the Few, the Stickiness Factor, and the Power of Context. explaining

The Law of the Few ‘contends that before widespread popularity can be attained, a few key types of people must champion an idea, concept, or product before it can reach the tipping point.’ Simply put, to start a trend we need some people to actually spread the word of the need to vote differently, vote wisely – make an informed choice. In the current SG context, getting information out to the voters is absolutely crucial. How can they hear, read, know, understand unless someone tells them?

The Stickiness Factor refers to ‘a unique quality that compels the phenomenon to stick in the minds of the public and influence their future behaviour…(and) often represents a dramatic divergence from the conventional wisdom of the era’. The conventional wisdom appears to be “VTO” (Vote Them/PAP Out) to effect change. The VTO cry recognizes that the only legal way to effect the change is via the ballot box. But we need the votes of the FMMs (fence-sitters, the marginal supporters & the mal/mis-informed citizens). FMMs have their own concerns for their own future based on their own values and individual situations. Many of them have been exposed, maybe even conditioned, to the dominant PAP’s narratives of a Singapore that is forever under siege, our fortunes tied entirely to PAP’s survival as a party. VTO will not stick with them. But a more nuanced message that PAP cannot have their own way without parliamentary and popular consultation, cannot ride roughshod over FMMs’ legit concerns may better achieve a first if tenuous foothold on their minds.

Finally, the Power of Context refers to the ‘environmental and historical moment’ being conducive to the start of a trend without which no trend can take off. On this, Singaporeans’ current living environs (the very real stresses from population influx, retirement inadequacy and insufferable cost-of-living) are highly supportive of change. The historical moment is less obvious. Where some see the oppressive costs to personal livelihoods, others are still blessed in their ignorance servicing their below-water mortgage, hire purchase, daily expenses and annual vacation – only so long as mommy & daddy are not replaced by foreign talents.

Here’s the Idea – and Your Part in the Game
Putting all Gladwell’s analysis together, what do we get?

The Opposition’s show of solidarity, though unprecedented, does not appear to meet much of the 3 factors to create that GE2015 Tipping Point. Maybe, these will:-

The Law of the Few suggests that just being a keyboard or armchair warrior at tremeritus.com or TOC will not help in tipping over the votes. People, we must allocate more of your internet time (reading, commenting, venting our anger) to actively email selected, rationally-argued articles to family members, friends, colleagues and LinkedIn/FB contacts. Do nothing (name-calling, condemnation, sarcasm etc) to turn them off from reading for themselves such articles. If we can’t even get thro’ this, our cause is lost – already.

We also cannot run away from the fact that money is needed to advance our cause. Each Opposition candidate needs about S$25,000/- to stand in the GE ($16k deposit + print, distribution, rally expenses etc). Therefore, please be generous with whatever you can give – sacrifice that sugarcane juice or bottle of beer.

What would constitute a sticky message to reach out to the FMMs? I suggest ‘End PAP’s Dominance’.

True, the slogan is negative in nature without a positive alternative. Perhaps, that’s what is needed to move the FMMs to vote Opposition. It is a stretch to think that PAP will be mortally defeated next GE. Electoral victory is a game of hard numbers. With the GE2011 60/40 vote ratio momentum and incumbent’s control of mass media, the PAP machinery will likely win, even if that momentum is decelerating. Remember, it’s the FMMs whose hearts & minds we need to convert. So, with a less threatening ‘End PAP’s Dominance’, should anyone ask, ‘what’s your alternative?’, we create the opportunity to explain that at this stage, SG needs a) a critical mass of non-PAP MPs to keep the PAP in check and b) demand greater access to info and data without which no alternatives can be intelligently conceived for the FMMs’ consideration.

Finally, on the Power of Context, at the risk of oversimplifying Gladwell, I’ll just latch onto the Magic Number of 150. Basically, his research suggests that 150 is ‘the group size conducive to achieving the tipping point’. How to apply that? Well, those Opposition CEC members and their candidates who helped create the current solidarity add up to about 150. But they appear not to be creating the counter-momentum needed to win more constituencies. And time is short!

Here’s where we come in. PAP already wins by default when we hide behind monikers to speak our minds. We submit ourselves willingly to the unspoken climate of fear of retaliation or retribution by the PAP against us voters. Sadly, many TRE commentators with highly-reasonable and brilliantly-reasoned perspectives are succumbing to that perceived fear. ‘Like that, how to win?’ TIME & TIDE WAIT FOR NO MAN in the change we want, to End PAP’s Dominance. Put your name where your heart is NOW!

By using our real names, we send the clear, unequivocal message to all Singaporeans – and the world – that we refuse now to bow and scrape to the fake aristocracy that has shamelessly used organs of government and taxpayers’ money to instil fear and for their own party’s advantage. Thus far and no further will you do what, how, where, when you like without accountability. I salute the likes of Philip Ang, Chris Kuan, Chua Chin Leng, Ng Kok Lim, Lye Khuen Way etc at TRE who have brazed the trail in this regard.

Whence the 150 good men and women to step forward with your name behind your cause? Or you will tell your children and others how you help change the tide of SG history under your moniker ‘abc’ or ‘xyz’?

Let’s Tip It!
So, people of Singapore, here’s how we may tip GE 2015 for us and our children:

– The slogan : END PAP’S DOMINANCE!
– The substantive : Play your part; share, spread the information & contribute a little of your money to Opposition candidates and parties fighting at the frontline.
– The symbolic : Cast off your moniker, use your real name!

The PAP’s election strategy even at this early stage is so obvious it can only come from all those unproven military scholars. The AHPETC affair was really a reconnaissance in force to locate and fix the enemy before bringing on the full frontal assault of the general election campaign onto the entire opposition’s unproven competence in running town councils. No subtlety required.

Economy not so hot
However a slowing economy this year and the new normal of 2-4% GDP growth going forward means the PAP is vulnerable in their key competence; the economy. So better to use town council competency to fix the opposition parties onto the PAP’s chosen set-piece battle than to fight a less predictable encounter battle on the consequences of the PAP’s handling of the economy.

Little wonder then, Prime Minister Lee Hsien Loong was waxing lyrical about the past achievements of glittering 6% plus GDP growth in his tenure. But to voters, It is much more how socio-economic circumstances has and will affect one’s income, healthcare and savings plus all the ancillary factors such as cost of living, job opportunities and career prospects.

The Glittering GDP and Its Consequences
It is worth repeating that the Mr. Lee achieve his glittering GDP growth by running macro-economic policies along the same old capital and labour intensive growth model and the same old extreme fiscal conservatism of the past 50 years. Put on cosmetics and give them new names: “Growth Maximisation Strategy” and “Fiscal Prudence”. It is as if Singapore today is still the Singapore under Lee Kuan Yew.

As the writer repeats ad nauseam, macro-economic policies predicated on out-growing the natural constraints of land and labour have long term consequences. The more these policies are pursued, the more extreme the consequences.

Low Wages
Only 41% of Singapore’s GDP is accounted by wages, nearly 50% lower than the OECD average. Low wages and low productivity are caused by dependence on unskilled and inadequately qualified foreign workers which also caused under-employment and reduced career prospects among qualified local workers.

The government’s solution to wage growth from productivity growth is only a half-truth. As long as easy access to foreign labour remains, any increase in productivity will be captured by owners of businesses and capital rather than by labour.

High Real Estate Prices
Coupled with low taxes, rebates and business set-up subsidies, Growth Maximisation indiscriminately created too many businesses, many of which are non-viable without access to cheap labour, low tax, rebates and business set-up subsidies. The upshot is excessive demand for residential, commercial and industrial real estate property leading to rampant prices.
Inadequate Retirement and Healthcare
CPF and household savings are depleted in what is, in effect a massive financial transfer from households to the government as a result of rampant real estate prices and low rates of returns from savings. The absence of mandatory social entitlements meant that the depletion of savings result in inadequate provisions for retirement and healthcare.
Inter-generational Social Inequity

For the low-income and increasingly the middle income, inadequate provisions for retirement and healthcare, under present policies of using children’s CPF accounts to support the elderly, results in social inequality being passed from one generation to the next. It also prevents social mobility.

Incompetence or fixing the voter
The list can go on. In apparent contradiction to its own claim of competency, the PAP is very bad in managing the consequences of its economics. If macro-economic policies calls for a huge influx of foreign workers, then infrastructure spending must increase to meet the demand of the large increase in population.

Is it sheer incompetence – why else is it possible for a government to be “blindsided” by demand for housing when the same government controls the Growth Maximisation strategy and all policies levers? Or is it a deliberate policy choice not to mitigate these consequences because of the beneficial financial effects to the government’s narrow party political objectives?

The excess demand for infrastructure and real estate delivers huge financial transfers to the government through Temasek’s ownership of the GLCs and land sale revenue. The resulting depletion of savings made the lower income and increasingly the middle income dependent on discretionary government hand-outs given in drips and drabs which, given these are non-mandatory entitlements, are in effect “fixing” the voters.

Gold Dust Among the Chicken Feed
The question should rightly be how or whether at all one has benefitted from the glittering GDP growth. Policies overly friendly to business and optimal to the government are rarely ever optimal to wage earners and Singapore has seen enough evidence of that. The sharp wealth disparity says Mr. Lee’s economic record is gold dust for the few among the chicken feed for the many.

So more of the same with 6.9m, maybe even 10m population? More of the same meanness and stinginess of a government which became excessively rich over stuff like “fiscal prudence” and “self-reliance”? Or is it time to stop voting against one’s own economic interest and help your country to change course before it irretrievably steers towards the rocks.

The scrooges in the government must be smiling over GIC’s 2015 Annual Report even if most of the improvements did not seem to derive from improved investment performance. The higher returns mean more monies for fancy jet-fighters, ministers’ bonuses, vanity projects and at the bottom in the order of priorities the odd crumbs for the huddled masses. And it also means more surpluses taken from CPF.

The writer will just focus on the returns of which GIC reports in US$ terms so currency movements are adjusted in S$ terms. For those who are concerned of China losses, GIC’s North East Asia (China, Japan and Korea) exposure comprised 15% of assets. GIC is known to have invested in both Chinese stocks and bonds. The recent collapse in Chinese equities is accompanied by a surge in bond prices (normal in most stock market collapses). The extent these offset each other and how they impact returns will not be known until next year.
Real Returns Improved because of Inflation
These are the 20 year rolling US$ real (i.e. inflation adjusted) returns and the nominal (actual) returns in 2015 in comparison to 2014.
US$ Real Returns (a) US$ Nominal Returns (b) Inflation (b – a)
2015 4.9% 6.1% + 1.2%
2014 4.1% 6.5% + 2.4%

The most interesting thing is the significant improvement in the real rate of return from 4.1% to 4.9% but the nominal returns fell from 6.5% to 6.1%. How so? That is because the inflation rate has halved from 2.4% to 1.2%. Therefore the improvement in US$ returns did not come from an improvement in investment performance but from a fall in the inflation rate. The fall in nominal US$ returns is due to the strength of the US$ in the past 2 years.

Huge Swings in 5 year series
There are huge fluctuations in the 5 year US$ return series.
2013 2014 2015
5 year US$ returns 2.6% 12.4% 6.3%

The large jump from 2.6% to 12.4% in 2014 is due to the 20%+ loss in 2009 falling out of the 5 year series but still retaining the 20%+ recovery in 2010. With the latter falling out in this year, the return is now normalised.

Clearly, the improvement from 2014 was entirely due to the fall in the annualised appreciation of S$ over the US$. In the meantime, the S$ continued to strengthen against other currencies such as A$, Euro and JPY which explains the improvement in currency translation by +0.7% was not fully reflected in the improvement in the S$ returns (+0.3%).

GIC is relatively conservative.
A star fund manager historically gets 25% or more of his investment calls wrong. Extrapolating the few known GIC losses across an entire portfolio to allege huge losses and extreme risks is terribly unsound analysis. A diversified portfolio has huge correlations within its asset mix in which, like the current Chinese turmoil and the 2009 market dislocations have shown, events that caused some investments to fall, also causes other to rise to various degrees. Due to such infinite outcomes and permutations from hundreds of individual investments, the portfolio’s risks and returns need to be assessed in entirety.

The simplest method to gauge the riskiness of a portfolio is to analyse its historical volatility – the extent of the ups and downs of its returns. High risk investments have potential for high returns but also high losses; hence their prices fluctuate more than low risk investments. A portfolio with higher historical volatility therefore has more higher risk investments.

Helpfully, GIC provides its annualised historical volatility. Although Norway’s GPF as a comparison does not, its historical volatility can be calculated from its annualised returns. The caveat is that there is a slight duration gap in the analysis as GPF’s annualised returns went back only 18 years.
Nominal Returns 10 year Volatility Excess Returns over GPF
GIC 5.8% 9.0% 0 %
GPF 6.1% 10.2%

GIC’s lower historical volatility infers it is a more conservative asset manager than GPF but both are relatively conservative. A high risk equities only portfolio will be closer to 20% volatility. Since higher risk potentially results in higher returns over the long run, this is evidenced by GPF’s superior return of 6.1% over GIC’s 5.8%. However, the important question is whether GPF’s higher returns compensates for its higher risks in comparison to GIC. The excess returns, calculated to equalize risks, shows there is no difference between GPF and GIC which means GPF’s superior return is entirely due to higher risk tolerance. In fact GIC and GPF are like twins.

The amount of excess returns (i.e. the difference between GIC’s nominal S$ rate of return and interests paid to CPF) is $34.4b for the 4 years from 2011. The excess returns went into the government’s (unreported) surplus but would have meant larger balances for members and larger CPF annuities pay-out.

Hope you find this useful.

Chris Kuan

* Chris was regional head of capital markets for Asia Pacific until his retirement. He writes opinions and commentaries mostly on economic and financial matters.